Subrogation against a negligent tenant by a landlord’s property insurer is a major source of recovery income for many insurers. Unfortunately, as is all too often the case, the law in many states has been developed in such a way to make recovery opportunities very difficult, if not impossible, to pursue. The ability of a landlord’s property insurer to subrogate against a tenant for property damage caused by the negligence of the tenant depends on which state the loss occurs in and the nature and language of the lease involved. There are generally three different approaches:
- A minority of courts hold that, absent a clear contractual expression to the contrary, the insurance carrier will be permitted to sue a tenant in subrogation.
- Seeking to avoid a per se rule, in some states the ability to subrogate must be assessed on a case-by-case basis and governed by the intent and reasonable expectations of the parties under the terms of the lease and the facts of case.
- Known as the “Sutton Rule”, some states hold that, absent a clearly expressed agreement to the contrary, the tenant is presumed to be a co-insured on the landlord’s insurance policy, and, therefore, the landlord’s insurance carrier has no right of subrogation against the negligent tenant. The rule of subrogation known as the “Sutton Rule” states that a tenant and landlord are automatically considered “co-insureds” under a fire insurance policy as a matter of law and, therefore, the insurer of the landlord who pays for the fire damage caused by the negligence of a tenant may not sue the tenant in subrogation because it would be tantamount to suing its own insured.
The “Sutton Rule” is derived from an Oklahoma Court of Appeals’ decision styled Sutton v. Jondahl, 532 P.2d 478 (Okla. App. 1975) and is the benchmark against which the landlord/tenant subrogation laws of most states is measured. It is the modern rule and the rule more and more states are moving toward.
There are three approaches used by trial courts in the country to resolve the implied co-insured “Sutton Rule” approach. These approaches include:
- The no-subrogation (or implied co-insured) approach, in which, absent an express agreement to the contrary, a landlord’s insurer is precluded from filing a subrogation claim against a negligent tenant because the tenant is presumed to be a co-insured under the landlord’s insurance policy;
- The pro-subrogation approach, in which a landlord’s insurer is allowed to bring a subrogation claim against a negligent tenant absent an express term to the contrary; and
- The case-by-case approach, in which courts determine the availability of subrogation based on the reasonable expectations of the parties under the facts of each case.
Until recently, only two states – Hawai’i and West Virginia – had not weighed in on the law in this area, leaving subrogated carriers scratching their heads with regard to their rights of recovery. Last fall, the Supreme Court of Appeals of West Virginia decided a case which resolved the matter in that state.
In Farmers & Mechanics Mut. Ins. Co. v. Allen, 778 S.E.2d 718 (Va. 2015), Michael O’Connor and his adult daughter Shelly O’Connor own real property located at 175 Keys Street in Keyser, West Virginia (“subject property”), as tenants in common. In December 2009, Shelly O’Connor entered into a lease-to-own agreement for the subject property with Marcus Allen. The agreement provided that Marcus Allen would pay Shelly O’Connor $625 per month for fourteen years, after which he would own it. The lease-to-own agreement described the consequences tenant Marcus Allen would face for causing damage to the property: “if the house is being damaged Mr. Allen will be evicted and have thirty days to get all his belongings out and return the keys to the landlord (Shelly O’Connor).”
Shelly O’Connor purchased homeowners’ insurance from Farmer & Mechanics Mutual Ins. Co. (F & M). Her father, Michael O’Connor, was named as an additional insured, but Marcus Allen was not. Shelly and Marcus Allen purchased renter’s insurance from State Auto Insurance providing coverage of $20,000 in personal property coverage and $100,000 in liability coverage.
Marcus Allen was cooking food on the stove when a grease fire started resulting in property damage to the home and the death of Marcus Allen. F & M paid $85,000 to Shelley O’Connor. Marcus Allen sued Michael O’Connor for wrongful death claiming that the home didn’t have a smoke detector in the home. F & M answered the suit on behalf of O’Connor and counterclaimed for subrogation against the tenant. State Auto filed an answer to the counterclaim on behalf of Marcus Allen, asserting that F & M could not maintain a subrogation claim against the Estate, arguing that tenant/decedent Marcus Allen obtained an interest in the F & M policy because a portion of each monthly payment he made to Shelly O’Connor under the lease-to-own agreement went to “mortgage, insurance and taxes.” Thus, the Estate argued Marcus Allen was an additional insured under the F & M homeowner’s policy and, under established insurance law, F & M could not seek subrogation against its own insured. Both parties filed Motions for Summary Judgment on the issue and the trial court granted Marcus Allen’s motion, concluding that tenant/decedent Marcus Allen had an interest in the F & M insurance policy because a portion of his rental payments were allocated to “insurance” pursuant to the lease-to-own agreement. The trial court did not rule that Marcus Allen was a named, additional, or definitional insured under the F & M policy. Instead, the circuit court concluded that Marcus Allen was an “equitable insured.” The Court reasoned that F & M should not be allowed to pursue the equitable remedy of subrogation because Marcus Allen’s monthly payments went toward mortgage, insurance, and taxes. It held that there was nothing equitable about allowing F & M to subrogate against Marcus Allen on a policy purchased with Marcus Allen’s money for a loss covered under that policy. F & M appealed to the Supreme Court of Appeals. The Supreme Court of Appeals is West Virginia’s highest court and the court of last resort. West Virginia is one of only nine jurisdictions with a single appellate court. A century ago, state court systems had only a single appellate body – the state court of last resort. As these courts began to experience a growth in appellate cases which overwhelmed those courts, forty states responded by creating an intermediate Court of Appeals. The only states which have not followed suit are either sparsely-populated or geographically compact.
For the Court of Appeals, the issue was whether the tenant was an “insured” under the F & M homeowners’ policy. In an unanimous opinion, the Court observed it has never held that a person who is not a named or definitional insured may be considered an “equitable insured.” The Court held if the insurance contract unambiguously identifies the insureds, then a court may not, by judicial construction, enlarge the coverage to include other individuals foreign to the insurer. To do so would be “patently unfair” since the insurer “has a right to choose whom it will or will not insure.”
The Court ruled that a residential tenant is not an equitable “insured” under a landlord’s homeowners’ policy, unless specifically named. Therefore, the landlord’s insurer could maintain a subrogation action against a tenant for the damages the insurer paid to the landlord following a fire or other destruction of the leased premises caused by the tenant. The tenant is neither a named nor a definitional insured of a landlord’s homeowners’ insurance policy. He is not an “insured” under the landlord’s policy by the mere fact that the tenant may have an insurable interest in the leased property. F & M was allowed to subrogate.
With this decision of first impression, West Virginia has now joined forty-eight other states which have declared the law in this area. Hawai’i remains the lone holdout. For a summary of the law regarding landlord/tenant subrogation in all 50 states, see our chart found HERE.
If you have any questions regarding this article or subrogation in general, please contact Gary Wickert at email@example.com.